Business Debt Negotiations

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What Are the “Essential Elements” Involved in Negotiating Business Obligations? –

The “Essential Elements” in negotiating debt are usually put into a written and signed contract or a lease or could also be oral arrangements or could be customary terms in an industry that that are understood by all parties. Often a creditor may be more flexible with some elements than others; for example an element like the total amount of the debt may be inflexible to a creditor, but the same creditor may be much more flexible with the time to pay the debt and the interest rate, essentially giving the debt much better terms for repayment Once we determine which elements are “Anchor Elements”(inflexible terms) and which are “Softer Elements”(subject to some negotiation) and which are “Fluid Elements” (subject to a great deal of flexibility) we can know how to negotiate with a creditor.

These Essential Elements in negotiating debts or expenses are as follows:

1. Amount – The total amount of the debt;
2. Installments – The amount of regular installments;
3. Timing – The timing of the debt payment;
4. Interest – The amount of interest to be paid on the regular installments;
5. Default/Lateness – The terms or amount due or consequences if the debt is not paid timely;
6. Exchange – The quantity, quality and timing of products and services that are being paid for with the debt/expenses;
7. Rate – How the products and services are being charged;
8. Exclusivity – Whether the parties are free to contract with others for the same or similar product or services;
9. Term of the Contract – The length of the obligation and how and whether it is extended;
10. Personal or Cross Guarantees – Whether the business principals are personally liable for the business debt or made another business a guarantor;
11. Security – Whether the debt is collateralized in assets like real estate, equipment, vehicles, inventory and/or cash receivables.
12. Exit – How and under what terms can a party exit the agreement?

What Can Be Negotiated with Business Debt and Expenses? –

The question is often how and what to negotiate with business debt and expenses and the answers are often situational and depend on what is needed by the business and what is potentially acceptable for the creditor to negotiate. Below are ways to negotiate debts and expenses that are possibilities but which are are case by case specific:

1. Time to Pay the Debt – Often if the creditor is not flexible with the amount of the debt, they may be more flexible with the amount of time to pay the debt. Consequently the regular installment payments on the debt would be reduced. Often when a business is in a cash flow crunch reducing the monthly overhead is key to survival and such an agreement would not necessarily be threatening for a creditor, especially when confronted with worse alternatives (the business, due to it’s hardship, not being able to pay at all).
2. A Reduced Regular Payment or Payoff – In other situations a creditor may be open to the amount being paid being reduced especially when what is paid is paid either on time or sooner. To maintain regular payments a creditor may reduce the payments or to get a complete payoff of the debt they may drastically reduce the debt.
3. Better Terms as to Interest and Other Charges – With some debts, like credit cards, the amount of interest paid on the debt can be very central to the amount paid by the business on an ongoing basis and in total.
4. Reducing the Services or Product for a Lower Payment – Sometimes the creditor has the flexibility to change agreements if the customer is agreeing to receive less in services or product.
5. Increasing Services or Product for the Same Payment – Sometimes the creditor is unwilling to reduce its payment, but is more flexible on delivering more services or product for the same fee.
6. Mitigating or Eliminating Harsh Default Terms – Sometimes during periods of business crisis it becomes clear that harsh default and/or late payment terms are unrealistic and need to be renegotiated by mitigating or eliminating them.
7. Negotiating a Better Rate – The rate by which creditor charges, can often be renegotiated on a going forward basis in a changing economic environment. Services charged on an hourly or by task basis and/or product charged on a quantity and quality basis can all be renegotiated especially where the underlying premises for the previous agreements have changed.
8. Reducing or Mitigating Guarantees or Collateral – The guarantees or security given for a loan may be an important term to negotiate especially where there is economic uncertainty. The creditor in exchange for actual payments may loosen up guarantees or security going forward, especially in a changing environment where certain obligations may become unrealistic or uncompetitive. For example, “good guy” clause in the personal guarantee of a lease can be negotiated to limit the business owner’s personal risk if the business is unable to keep up with its lease obligations.
9. Negotiating the Duration of the Agreement – The length of an agreement with a creditor can be renegotiated. Often the creditor may be flexible to reducing payments if an agreement is expanded in terms of duration. The opposite is also true where payments are accelerated or at least kept the same in a deteriorating environment the creditor may be open to reducing the duration of the agreement.
10. Negotiating Exit Terms – Sometimes where the situation is dire exit terms out of an agreement need to be negotiated and the changing environment may influence whether the creditor may seek compensatory terms an earlier exit or whether the business can assert that maintaining the same remuneration in a harsher environment is sufficient to warrant ending the agreement earlier.

Which Business Debts Can Be Negotiated ?-

All business debts can be negotiated as to their terms. Each type of business debt or obligations has terms as to amounts due, time given to pay, interest, additional payments, security or guarantees given to assure payment and other conditions. Generally all or most of such terms are negotiable. The types of business debts that can be negotiated are:

1. Secured debts – collateralized loans like mortgages, equipment financing, and/or vehicle loans.
2. Unsecured debts – un-collateralized loans like credit cards and/or personal loans.
3. Leases – leases for business offices, machinery (like copiers, phone systems, vehicles.
4. Taxes – obligations to federal, state and local governments like income, payroll, corporate sales taxes and real estate taxes.
5. Payroll – the actual compensation for employees and independent contractors.
6. Arrears on Expenses – arrears on expenses such as rent, utilities and other bills can be negotiated in terms of repayment terms.

Tools to Negotiate Business Debts –

In order to obtain concessions from creditors for business debt there need to be tools with which to negotiate or to motivate a creditor to give the borrower better terms. These tools can be positive motivators (“carrots”) like payments, security, guarantees OR negative motivators (“sticks”) like the threat of non-payment, bankruptcy and/or litigation. Usually before a negotiation starts an evaluation needs to be made as to what is being offered to the creditor to motivate them to give concessions. The business agreements (contracts, leases or other signed agreements) themselves are a place to start to see when and under what conditions can the debtor/borrower pause or stop making payments and/or seek resolution to a dispute in arrangements. Usually ambiguities in agreements or changed conditions can be used to support a position that favors the debtor/borrower.